Should CMHC Reintroduce The “Regional Mortgage Cap?”

More likely than not, your answer here will depend on where you live.

But if you’re not aware of what a “regional mortgage cap” is, or was, consider that until 2003, the Canada Mortgage Housing Corporation (CMHC) had different maximum dollar amounts on loans they would insure, for different areas, having recognized that prices (gulp!) are different in different areas!

With the growing disparity in average price between cities across Canada, the idea of one mortgage cap for the whole country is getting more and more ridiculous.

Is it time for CMHC to bring back the regional mortgage cap?

CanadaMap

Let me give you a scenario…

You’re trapped somewhere – whether it’s like the 33 Chilean miners (BTW – the movie “33” with Antonio Banderas isn’t half bad), or like the survivors of a plane crash in the mountains, or like any other situation from a movie or in real life, where people are stuck in a fixed location with a diminishing amount of food.

You’re in a group with men, women, and children, each of whom is of a different age, height, and weight, not to mention of different health.

You have a limited amount of food at your disposal.

So how do you divide that food up?

What is “equal” among the group?

Let’s say there are 20 of you, and you have 100 crackers.  Does each member of the group get five crackers?

What if one member of the group is 300 pounds, and one member of the group is 100 pounds?  Doesn’t the 300-pound person need more food to sustain life than the 100-pound person?

Should the food be apportioned equally, based on number?  Or equally, after taking into consideration the differences between each person, who are not, by all accounts, equal?

“One size fits all” is certainly the easiest method, and it’s probably the most “fair” from a subjective viewpoint.  But if you truly considered all the variables, and the goal was relative fairness, then you’d most certainly account for the differences.

So where am I going with this?

Canada is a country, and within that country there are provinces, and within those provinces there are cities, towns, areas, and neighbourhoods.  You have rural “middle of nowheres,” and you have the centre of “the action” in major metropolitan areas.

And yet, the Canadian Mortgage Housing Corporation has ONE single cap on the loan amount that they will insure, across the entire country.

Does this make sense to you?

Consider how different various areas of our massive country can be as you move east-west, north-south, and in and out of various provinces and cities.

And thus consider how different prices are across the country, and how relative purchasing power differs for Joe in Saskatoon, and Bob in Vancouver.

Let me take a quick step back here for a moment and remind everybody what CMHC is.

We all think of the CMHC as the crown corporation that insures our mortgages.

But the CMHC, at their core, is here to assist first-time buyers with the purchase of their homes.  Or at least, that was the purpose of their formation after World War II, and was their mandate for decades on a go-forward basis.

Today, it seems the CMHC is simply here to provide insurance on mortgages, with the risk being shared equally among 33,000,000 tax-paying residents of the country.

We all know that the CMHC will only insure mortgages for properties purchased for under $1,000,000, and that this was instituted back in 2012.

So before that, it was just “let the good times roll,” right?

Not so.

In fact, there was a “regional mortgage cap” up until 2003, when it was wiped out, and ONE mortgage cap was provided in its place.

I can’t speak to why the regional mortgage cap was wiped out, but I can say that a lot of people have suggested the CMHC bring it back.

I had coffee with Ben Rabidoux this week, and we chatted with a few real estate bears who continued to marvel at how our market keeps moving, and moving, and moving, defying all logic.

The bears wanted to know, “What could be done to cool the market?”  We explained that steps have been taken; many steps, in fact, whether it’s the 5% minimum down payment, the 20% down payment for properties over $1 Million, the 20% down payment required on second properties, or the abolishment of the 40-year amortization.

And then Ben had an idea, which admittedly, he’s been preaching about for years: bring back the regional mortgage cap.

Here’s an excerpt from an article Ben wrote back in January of 2014, which you can read in full HERE.

Prior to 2003, CMHC had a regional mortgage cap that set a maximum dollar amount on the size of mortgage they would insure. This made a lot of sense given that CMHC’s original mandate was geared toward helping first-time buyers get into entry-level housing. The logic here is simple: If a buyer can afford a home that is priced significantly above the local average, they shouldn’t need what effectively amounts to a taxpayer-backed subsidy to do so.

In what can only be described as a massive policy blunder, this cap was eliminated in 2003. For nearly a decade, CMHC would insure mortgages of any size, from simple starter homes to opulent mansions, a truly epic case of “mandate creep.” In 2012, a nationwide limit was re-established; CMHC will no longer insure mortgages on homes that are purchased for more than $1,000,000.

This is a step in the right direction, but it ignores the fact that a million-dollar home is well above a starter home in nearly all parts of Canada. This should change. One possible solution would be to set the maximum mortgage cap to the average resale price in each census metropolitan area and have that cap change annually to reflect changing house prices.

It’s not my job to set fiscal and monetary policy across the country, nor is it really any of my business whether the real estate market goes up or down.

But reinstating the regional mortgage cap, whether you’re doing so to “cool the market” or not, is a very logical idea.

Just consider the average price of a home in these major Canadian cities:

Saint John – $175,557
Quebec City – $254,831
Halifax-Dartmouth – $264,487
Winnipeg – $271,759
Regina – $316,025
Montreal – $339,436
Saskatoon – $342,553
Ottawa – $358,950
Edmonton – $371,756
Calgary – $444,535
Victoria – $543,459
Toronto – $630,876
Vancouver – $937,334

Look at the spread!

The average house price in Vancouver is three times the average house price in Regina!

And yet residents of both cities have the same maximum dollar amount for CMHC-insured mortgages.

Does that make any sense?

If the apparent mandate of the CMHC is to assist first-time home buyers, and help get people into the market, then should they really be insuring mortgages for $995,000 homes?

Sure, in Vancouver, that’s an “average” house, and the average home-buyer buying an average house might fit the apparent mandate of the CMHC.

But what does $995,000 buy in Edmonton?  Or Saint John?  Or in the middle of nowhere in Nunavut?

Shouldn’t there be some accounting for the different house prices?

A person buying a $995,000 house in Vancouver might be the very first-time buyer that the CMHC wants to help, but the same can’t be said for the person buying a $995,000 house in Regina.

Is the CMHC now in the process of “helping” folks buy mansions across Canada?

At the end of the day, people have to remember that it is they that are on the hook for all of these mortgages, not some sort of non-entity with an acronym for a name.

So if you say, “I don’t care what CMHC does,” you might as well say, “I don’t care if the Liberal government snuck in more eco-taxes last week,” or “I don’t care if my marginal tax bracket increases.”

And one more thing – as a shout out to Ben Rabidoux, another section of that January, 2014 article read the following:

CMHC currently has a program that allows buyers to purchase a second home with as little as 5 per cent down. This program is most commonly used for purchasing recreational properties such as cottages, but can also be used to purchase a “pied-à-terre” for those who have to often travel to another city for work, or to purchase a home for children while they are attending college or university.

In the context of CMHC’s original mandate, this program is simply indefensible. If someone is fortunate enough to have the income and assets to purchase a second home, for recreational purposes or otherwise, they should not require taxpayers to bear the risk, particularly considering that the majority of Canadians are not fortunate enough to own multiple properties themselves. This program needs to go.

As an aside, contacts in the mortgage industry suggest that some investors are also currently abusing this program. In 2010, the government wisely changed the rules so that investors must put down 20 per cent on investment properties. However, the door has been left open to purchase investment properties with 5 per cent down through the Second Home Program, with taxpayers bearing the risk. Of course, the applicant can’t state up front that the home will be rented out, but they are free to quietly rent out their second home after the deal closes.

That program was, in fact, eliminated last year.

Have a re-read of the article if you get a chance.

Perhaps it’s time to update that article?  Or provide a follow-up?

Maybe that should be the topic of Monday’s blog…

23 Comments

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  1. Appraiser says:

    @ Chris: Wow! reaching back 44 years to make a point is a little rich. CMHC introduced the Assisted Home Ownership Program (AHOP) in 1971, to help low-income people attain homeownership, and it was a debacle to be sure. However, it is exactly the mandate that critics of CMHC, like Ben Rabidoux wish they would return to. How ironic.

    CMHC has been urged by “experts” for years to do one thing or another. Cherry picking a headline from almost 20 years ago, as if it were a fact, does little support your thesis (whatever that is).

    1. Chris says:

      you’re right – who would want to do something like learn from history – that’ just for nerds….

      1. Kyle says:

        LOL, I’d hardly call Globe and Mail reporting from any era a good reflection of “history”. Jebus, do you have a stack of yellow newspapers piled to the ceiling in your living room? You keep pulling these ridiculous 30 year old quotes from that rag, and holding them out as if they were irrefutable evidence. Someone could pull a quote from a Rob Carrick or Tamsin McMahon article from the last 4 years and conclude that Toronto real estate had surely plummeted in the early 2010s, given how they perpetually talk about the coming correction as a foregone conclusion. God help anyone, silly enough to put any stock in a G&M quote from decades ago.

        1. Chris says:

          @ Appraiser: People analyze stock markets all the time by looking back 20 years and nobody accuses them of “cherry picking” to try to make a point. You pointed out the $21 billion of tax payers money the CMHC has returned to tax payers in the recent past – but you left out any reference to past difficulties the CMHC has experienced – if analyzing their successes is valuable, then so is analyzing their rough spots….

          @ Kyle: Nobody here has said that what happened in the past (positive or negative) to the Toronto housing market (or any housing market) is necessarily an exactly blueprint for what’s going to happen in the future – but trying to pretend that there is no relevance to historic information just because it’s a couple of decades old or got reported in a newspaper you don’t like doesn’t further the conversation or help your argument seem strong. Nobody is going to pull a Rob Carrick quote and erroneously conclude the housing market crashed when it didn’t. In fact, here’s Rob Carrick from September 24th of this year on the housing market:

          “If you’re primed to buy anyway, then listen up. Stop trying to save a 20-per-cent down payment and get into the market now.”

          Judging from what you’ve written, the list of sources you refuse to accept as valid is quite long. You wouldn’t need me to point that out if you had a more balanced information diet.

          1. Appraiser says:

            @Chris:

            Thank you for providing an excellent example of how analogy is the weakest form of debate.

          2. Kyle says:

            ” but trying to pretend that there is no relevance to historic information just because it’s a couple of decades old or got reported in a newspaper you don’t like doesn’t further the conversation”

            Depends on what you call “historic information”, if it is data, facts or real evidence, then i agree there’s relevance, but when it is just something that someone said, an opinion that someone held or a columnist’s beliefs from 4 years ago or 40 years ago, IMO it is all largely worthless (other than to maybe to line birdcages with). Personally i prefer to consume data and form my own opinion, rather than consume opinions and then go and search for data.

      2. Appraiser says:

        I’m afraid you haven’t presented enough relevant information to learn anything from.

        Whining about a program that was shut down four decades ago amounts to nothing more than nagging.

  2. Appraiser says:

    CMHC has an overall portfolio cap of $600Billion but has steadily decreased its insurance in force over the past several years as existing mortgages are retired and fall off the books. The latest quarterly report from CMHC indicates that the insurance-in-force amount is currently $525B at Q3 2015, down $18B from year-end 2014.

    Over the past decade CMHC has contributed $21Billion back to the Government of Canada in the form of profit and taxes.

    CMHC has capital reserves that are 345% greater than the amount mandated by OSFI for financial institutions.

    http://www.cmhc-schl.gc.ca/en/corp/about/core/core_001.cfm?WT.cg_n=TWT_MLI

    1. Chris says:

      It’s easy to make money as an insurer when things are going well with the asset you insure. Much harder when it’s not. The rosy picture you paint in your comments here hasn’t always been the case with the CMHC:

      “AHOP Debacle Leaves CMHC a Giant Landlord – But Broke” The Globe and Mail Nov 11, 1980:

      “The federal Assisted Home Ownership Program has pushed Canada Mortgage and Housing Corporation into “technical bankruptcy”.
      “Peter Crombie, CMHC’s controller, agrees that the CMHC is technically bankrupt, although it can always turn to the federal government.”

      or this: CMHC Urged to Rethink 5% Down – Low Deposits on Homes May Have Played A Role In Rising Mortgage Defautls, Observers Say”: The Globe and Mail Jan 12, 1996.

      “In 1985 CMHC reported it’s mortgage funds’ accumulated deficit was up sharply to $782.2 million at the end of 1984 from $513.2 million a year earlier. The fund’’s main financial problem was continuing losses from the Assisted Home Ownership Program. Under the program, CMHC could lend up to 95 percent of a down payment and subsidize a homeowner’s interest payments”.

  3. crazyegg says:

    Hi All,

    Great topic and thanks for sharing the valuable links!

    One point that stands out is:
    * Does this mean that a borrower will no longer be able to act as a co-borrower on another application?
    * CMHC will now limit the availability of homeowner mortgage loan insurance to only one property (1 – 4 units) per borrower/co-borrower at any given time.

    This bloody crazy.

    This will mean that those with the “uber” means (i.e. not you, not me but the uber rich) will be buying investment properties because they can pony up the full 20% and bypass the insurance threshold anyways. The rich get richer….Bravo Harper.

    Regards,
    ed…

    1. Darren says:

      It isn’t crazy at all. Why should the taxpayers be taking some of the risk for people to invest in properties? If you take any other sort of investment and it blows up in your face there’s no one there to help you out. Why should real estate be different? If you want to invest, you can assume the risks yourself.

      1. Appraiser says:

        @Darren

        Investors already must put a minimum of 20% down.

        The former CMHC second-home program was never intended for investors but rather immediate family members or as a second home for oneself. The program was seldom used and represented a tiny fraction of CMHC’ porfolio. As such it’s demise was virtually inconsequential.

  4. Appraiser says:

    For anyone interested in the latest thoughts of the CEO of CMHC on the latest developments regarding tax-payer risk and other issues regarding CMHC I recommend:

    http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2014/09/cmhc-alludes-to-more-changes.html

    Take note there is no mention of re-instituting a regional mortgage cap.

  5. Appraiser says:

    Anyone interested in a reasoned, logical and “real-world” rebuttal to Mr. Rabidoux’s proposal should read the following:

    http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2014/01/more-free-advice-for-cmhc.html#more-71

  6. Joe Q. says:

    David writes: “In fact, there was a “regional mortgage cap” up until 2003, when it was wiped out, and ONE mortgage cap was provided in its place.”

    IIRC the single nation-wide mortgage cap didn’t get instituted until recently. There was a period of about 10 years where there was no cap at all. Correct?

  7. Kyle says:

    “The bears wanted to know, “What could be done to cool the market?” ”

    Simple, increase supply to meet demand, duh.

    1. Chris says:

      “The bears wanted to know, “What could be done to cool the market?” ”
      “Simple, increase supply to meet demand, duh.”

      The supply and demand you are referring to here is the supply and demand pertaining only to the house itself. When you buy a house through mortgage financing you effectively buy two things – the house and a mortgage product. There are supply and demand effects on the pricing of both. The CMHC’s interference in the market artificially increases supply of cheap, mostly risk-free credit for bank’s to sell to people – credit that otherwise might not be available to potential house purchasers were all the risk of loss wholly ascribed to the bank doing the lending. With an abundance of credit supply, there is usually higher house prices….

      http://www.mit.edu/~aschoar/Credit-Supply-and-House-Prices.pdf
      “We show that easier access to credit significantly increases house prices….”

      So it is important to address the supply of credit in this market if one wants to understand pricing….

      1. Kyle says:

        In David’s blog, he mentioned that he and a bunch of RE bears were gathered to discuss, “what could be done to cool the market”. Out of that came this dud of an idea of a regional cap. All i am saying is if they or whoever else really wants to cool the market or help affordability than forget about these kaka meme ideas, the way to do it is to increase supply to meet the demand. And that can be done by streamlining the planning, approval and zoning change processes, allowing lane way housing, increasing density allowances, not having a farcical City approval process that eats up time and eventually just gets overturned at OMB, shutting down illegitimate NIMBYism, etc.

  8. Kyle says:

    OMG David, you were in a room full of RE bears discussing how to cool the market. Geez, sounds like you were the counsellor for a Delusionals Anonymous meeting. Hope you gave them the 12 Steps to accepting reality. I imagine speaking with my 5 year old Daughter’s Montessori class about real estate might have been more productive. Unlike the bears who cling to make-belief theories, my Daughter and her school mates at least understand the difference between fiction and non-fiction.

    In seriousness i want to say a few things about the topic at hand. First let’s set the record straight. This line, “The logic here is simple: If a buyer can afford a home that is priced significantly above the local average, they shouldn’t need what effectively amounts to a taxpayer-backed subsidy to do so.” is pure propangandic bull sh1t. Not one penny of taxpayers money has gone to subsidize the insureds…EVER! In fact Gov’t coffers have been enjoying a steady stream of revenue from these premiums, so it is actually the other way around.

    Secondly, this is right from CMHC’s website, “CMHC helps Canadians meet their housing needs.” – FULL STOP. Whatever their “original mandate” might have been 50-60 years ago is irrelevant. Like any organization, priorities and focus will change and shift over time. Ben Rabidoux complaining that they should still be only be helping new buyers, and ignoring their other priorities, such as reducing systemic risk, aiding the free flow of financial intermediation, and helping those that can legitimately afford a home do so sooner, is like Developers complaining that the planning departments mandate was to encourage density so how dare they not let me build three 80 storey towers at King and John.

    Thirdly (not sure if that is really a word, but my rant isn’t done) the 1M, cap basically has done nothing to, “cool the market” in either Toronto or Vancouver, because by and large the number of transactions in the 1M range which used to rely on CMHC insurance is vanishingly small and other markets are already cooling. So what is he suggesting CMHC should do? Raise it higher in TO and Van relative to elsewhere, since home prices are higher there? Is he saying they should lower the cap outside TO and Van, where prices are already cooling? It makes no sense, perhaps he should come to my Daughter’s Montessori class, they could help get him and his cohorts one step closer to acceptance of reality.

    1. Joe Q. says:

      “Not one penny of taxpayers money has gone to subsidize the insureds…EVER!”

      This is correct. David referred to a “taxpayer-backed subsidy” — there’s no subsidy, but the insurance itself is still taxpayer-backed (in the sense that there’s no way the “insurance company” could itself default)

  9. Appraiser says:

    The notion of reinstating an arbitrary cap on CMHC insured loans is a solution in desperate need of a problem, regional or otherwise.

    One need only examine the Toronto and Vancouver real estate markets since the implementation of the $1Million cap in 2012. If the purpose of the cap was to cool those markets, it has failed miserably. If the purpose was to somehow “protect” tax-payers, it has proven erroneous. There is no correlation between sale price and propensity to default.

    Introducing a program that will only add layers of complexity, oversight and expense (at the cost of home buyers) is senseless.

  10. Paully says:

    Absolutely, they should cap CMHC coverage at a level no higher than the median price in each regional market!

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